London house prices fall for first time in eight years

London house prices have fallen for the first time in eight years, according to the latest quarterly Nationwide house price index. With a 0.6% fall on the same quarter of 2016, London thus became the weakest performing region in the UK for the first time since 2005.

The annual rate of house price growth remained broadly stable in September at 2.0%, compared with 2.1% in August.

Robert Gardner, Nationwide's chief economist, told capital.com: “We are not really surprised that London has underperformed. Affordability metrics are more stretched than in other parts of the country as prices in the capital had been outpacing the rest of the country for a sustained period.”

Robert Gardner, courtesy of Nationwide

Pre-crisis comparisons

“For example, compared to pre-crisis levels, London prices are 55% above their 2007 level compared with just 14% in the UK overall, while in Wales, Scotland and parts of northern England they are still around 5% lower.

“A property in London will cost the average first-time buyer almost 12 times average earnings compared to four and a half to five times in, say, Scotland and Wales.

He also points to recent changes in the buy-to-let sector which affect property in London more than elsewhere in the UK as the rental market is so important in the UK capital (of which more below).

Looking ahead problematic

Looking ahead is, as always, problematic. “It is very hard to see what will happen going forward,” he says. “We believe London prices will rise more slowly than in the rest of the UK because of the affordability metrics.”

“Housing market activity, as measured by the number of housing transactions and mortgage approvals, has strengthened a little in recent months, though remains relatively subdued by historic standards,” he says in the official press release detailing the figures.

“Low mortgage rates and healthy rates of employment growth are providing some support for demand, but this is being partly offset by pressure on household incomes, which appear to be weighing on confidence. The lack of homes on the market is providing ongoing support to prices.”

Nationwide House, courtesy of Nationwide

London's stalling

Russell Quirk, Founder and CEO of hybrid estate agent eMoov.co.uk, commented that London’s stall in growth during September is likely a continued ripple effect from the summer holidays as schools opened their doors and potential homebuyers were getting back into a routine with family.

“There are optimistic signs that the resilient London market will catch up to the rest of the UK in the coming months,” he says.

Russell Quirk, courtesy of eMoov.co.uk

Echoing Halifax

The Nationwide figures broadly echo those in the Halifax House Price Index issued on 7 September. The Halifax index showed house prices in the last three months (June-August) were 0.1% higher than in the previous three months (March-May).

Prices in the three months to August were 2.6% higher than in the same three months a year earlier. The annual rate in August was higher than in July (2.1%). This however has fallen from a peak of 10.0% in March 2016 when transactions grew sharply ahead of the introduction of new higher stamp duty tax rates for buy-to-let and second homes that came into effect in April that year.

London drag continues

Rightmove.co.uk, the UK's favourite web-based property search engine, said in its September prices bulletin that there is no sign of the usual autumn price bounce as what it calls the London drag continues.

The price of property coming to market fell by 1.2% (-£3,660) this month, the first monthly fall at this time of year since 2013, says Rightmove. The national average price was fall exacerbated by London continuing to readjust and smaller falls in the other southern regions.

This is potentially good news for buyers’ finances with average earnings of +2.1% now almost double annual property price increases of +1.1% – the lowest annual rate of house price increase since February 2012.

The number of sales agreed was higher than a year ago in all regions, up nationally by 4.8%. This shows that demand remains strong for the right property at the right price, says Rightmove.

The view from Canary Wharf

Oddly enough, UK residential property, in particular residential property in London and the potential for price reductions, features strongly in today's Morning Porridge investment commentary from Bill Blain.

The head of capital markets and alternative assets at the Mint Partners brokerage says: “The fundamentals of London property once looked superb – lots of foreigners looking for homes and a slice of London, and big banker bonuses driving up demand and prices.”

“But from the 20th Floor of Mint Towers, I can see innumerable cranes constructing residential tower blocks to the north, south and east of us.

Selling the (expensive) dream

“If I peer to the west I can sort of discern the cluster of buildings around Battersea Power Station called Nine Elms. They all sell the dream of luxury living for between £1m-£1.5m for a two-bed flat, with service charges lumped on top. Yet, I read there are nearly 30,000 unsold off-plan London new-build flats.

“For those us with property to sell, we could keep moving up the housing ladder, but for anyone with less than a £100k deposit and a £100k salary, forget being able to buy even a modest micro-flat on the fringes of civilised London.

“The median salary in London is around £35k. Most young folk in London stay at home or rent – and that’s not cheap. And the government decided to stamp out private landlords by making buy-to-let less attractive, while making a move up the housing ladder unattractive by sharply increasing stamp duty.

Prices must fall

“Now that the Chinese and Malaysians aren’t so keen on Brexit Britain, and bankers are fleeing to Frankfurt, I doubt there are enough buyers at £1m-plus to fill more than a few floors. We have lots of unsold, very expensive flats, and lots of people who can’t afford to rent them.

“Gosh.. how do we solve that..? When there are no buyers, prices have to move – dramatically lower. In the wake of the tragic Grenfell fire disaster, I read about the council buying a whole raft of brand new flats in a luxury Chelsea development. It got me thinking about the rest of London’s surfeit of luxury flats..

“What are these places really worth? The average rental for a two-bed flat in prime areas of London, including Canary Wharf, is probably around £2,000 per month – but that’s on very limited supply.

Let's assume

“Let’s assume a small two-bedroom flat off Docklands could achieve a £1,500 per month rental. To return a modest 4% yield, you are then talking about a price per flat of £450,000, or a 5% yield at £350k.

“If you can hike the rent to £2,000 per month – which would be about 100% of my son’s current disposable income – then you get a 4.8% yield from a £500k flat. These flats are currently on sale between £800k-£1.2m. Something has to give. Prices.

“Although I’m sure buyers will haggle, 5% is a fairly decent return on a real asset, and in view of the limited risk, these might be realistic levels where institutional investors would buy low risk private rental sector assets.

Could government do the smart thing?

“It’s also conceivable Government might do the smart thing and fund local authorities and housing associations to buy unsold (and even incomplete) blocks wholesale at distressed prices.

“Which means to shift all these flats, prices are going to have to shift dramatically lower...which is going to really peeve the whole property market as cheap flats impact the rest of the property sector.”

This, he comments, would cause every smug Londoner to question the deeply held conviction that their properties will make them multi-millionaires...

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